Nobody wants a new banking crisis. Nobody wants a new 2008. True, banks are generally in better shape today because of regulation. However, profitability has fallen (due to that same regulation). Of course we must remember that “best overall” is relative. Because inflation is now a factor that must be taken into account. So, now we have less debt, but we have more inflation. Which could lead us down similar paths.
A bank’s liabilities are the deposits it receives from its customers. And its assets are the loans it issues. A bank can get into solvency problems relatively easily during a crisis due to the increase in defaults and due to the fall in value of collaterals. A bank in trouble unleashes fear. And, with fear, come bank runs. Bank customers fear for the safety of their deposits and all withdraw money at the same time, thus creating a liquidity crisis. Pandora’s box is opened and the authorities must intervene to avoid a domino effect that contaminates the entire system.
The worst thing that can happen to an economy is that people choose to put their money under the mattress. If everyone withdraws their money from the banking system, the credit is suspended. AND, without credit, the economy would collapse. The value of money would rise dramatically, causing a tragic drop in investment, income, and consumption. With all the money under the mattress, we would have a static and decaying economy. The scarcity of money is fatal for the economy.
The last. After Credit Suisse shares plunged, the bank agreed to take a nearly $54 billion bailout from the Swiss central bank. It’s the same old story. Credit Suisse has been in trouble for years, thanks to its mistakes in managing risk. This is a rather unfortunate situation that has significantly damaged the bank’s reputation. That is to sayinvestors have lost confidence in the institution.
Now, it is highly likely that Credit Suisse will need to be taken over or bailed out. The Swiss government’s backing pledge last Wednesday night suggested that the authorities will not allow the bank to fail, because doing so would put the entire system at risk. In this case, a rescue will surely be necessary.
Meanwhile, in the United States, all eyes are turning to regional banks. These small banks are feeling the pinch most acutely. And, surely, intervention in some cases will also be necessary. Troubled banks will surely be taken over or bailed out. But the problem goes beyond that. All banks will feel the pressure to stop lending to get their balance sheets in order. In other words, the banking system will probably become more conservative as a protective measure. This new prudence will have an impact on everything.
The Secretary of the Treasury, Janet Yellen, appeared this past Thursday in Congress after the intervention of Silicon Valley Bank and Signature Bank. Yellen, of course, ensures that the US banking system is “solid” and that everyone’s savings are safe. What Yellen said, suddenly, is true. However, that is not to say that everything is rosy. Of course, the US banking system is equipped to avoid crises like this. The United States can handle this and more. But there are problems.
Will everyone now seek refuge in Bitcoin or gold? This bullish narrative may be used. And certainly the promoters of these ideas are likely to succeed in convincing many people of it. Which could generate increases in the short term. However, it is most likely that the crisis will be contained in time. The truly favored in all this will be the big banks. The big fish will eat the little ones. In other words, many regional banks will end up in the hands of the largest banks.
People will continue to trust the dollar and banks for a simple reason: credit. The vast majority depends (directly or indirectly) on the US financial market. Without your funding, the crypto market could not exist.
Why do we buy BTC? Most buy in the hope that someone in the future will want to buy it at a higher price. In many ways, Bitcoin depends on faith in the other. Or, put another way, Bitcoin depends on the other having faith in Bitcoin. And this faith is closely related to the future purchasing power of believers. Ironically, gold and BTC need the dollar to grow. Because they need credit. And there is no more important and influential lender on this planet than the US Federal Reserve.
The dollar is, in reality, an alliance between the private and the public. We are talking about a social, political, economic and technological apparatus that is at the center of society.d. In practice, it is very difficult to have our money under the mattress. Because, sooner or later, we are going to want to invest in something in order to earn more money. Sooner or later, we are going to believe to obtain a loan. Sooner or later, we are going to have to deal with the Government. In fact, if we have all our money under the mattress, sooner or later, we will still want to spend it and we will need others to accept it as a form of payment.
People who have their BTC in self-custody also need that BTC to be exchangeable for dollars. They require someone to eventually accept it and be willing to pay for it in dollars. Without that, what you really get is worthless code. In other words, even the most radical bitcoiner does not want this ship to sink. Because if this bank goes under, we all go down with it.
Volatility and confusion will be inevitable. And many will take advantage of the situation to make money with BTC and gold. Because the different narratives are always fighting to capture people’s money. That is not new. But madness is not eternal. In any case, in such complex times, the recommendation is to act with great caution.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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